The Financials sector was reconfigured earlier this year. Two payment processing companies, Visa (V, Financial) and Mastercard (MA), along with a handful of other more tech-related financial firms, were added to the GICS sector.
The change made the Financials Sector SDPR ETF (XLF) somewhat more diversified, with a smaller weight toward bank stocks compared to before. Momentum has been robust with the two credit-card stalwarts, and V and MA have sharply outperformed the XLF in the last year.
I am bullish on Visa given its healthy growth story in a sector lacking such optimism and momentum.
Credit Card Processors Outpacing XLF and Banks YoY
Source: Stockcharts.com
Company description
According to Bank of America Global Research, Visa operates the world's most extensive network of payment technology platforms. Its VisaNet processing network enables authorization, clearing, and settlement of electronic transactions.
The company offers processing and payment product platforms, including consumer credit, debit, prepaid, and commercial payments under the Visa name and other brands. Nilson reports that Visa is the biggest global credit network by volume and the second-largest global debit network.
Key data
The California-based $489 billion market cap Transaction & Payment Processing Services industry company within the Financials sector trades at a high 29.2 trailing 12-month GAAP price-to-earnings ratio and pays a low 0.9% forward dividend yield. With its Q4 2023 earnings report in the rearview mirror, shares feature a modest implied volatility percentage of just 15% while its short interest is also low at 1.9% as of November 9, 2023.
Earnings review
Back in October, Visa reported a strong quarterly earnings beat. EPS of $2.33 was above the $2.24 estimate while revenue rose 10.3% year-over-year to $8.6 billion, also modestly topping expectations. Strong growth in payments volume, cross-border volume, and processed transactions all contributed to the healthy quarterly performance.
Shares wavered in the sessions after the earnings release, but the bulls have plenty of reason for optimism. Consider that its management team raised the dividend by 15.6% to $0.52 on a quarterly basis and announced a $25 billion share repurchase program.
Still, risks include a slowdown in consumer spending, and weak University of Michigan Consumer Sentiment survey data underscores the lack of enthusiasm heading into the all-important holiday shopping season. Americans are depending more heavily on credit spending as excess savings dwindle, though a decent labor market and real wage gains for many consumer groups should support retail sales going forward.
We will know more following Wednesday's official Retail Sales report for October. As for Visa's outlook, it provided initial FY 2024 earnings guidance that was largely in line with estimates, though the Q1 guide was seen as soft.
Risks
Visa operates with a wide economic moat, and its track record of strong execution warrants a high earnings multiple even as cryptocurrency appears to be coming back into favor. Other key risks include adverse regulatory rulings, local or global payment networks gaining prominence, and near-term unfavorable FX swings.
Valuation and dividends
On valuation, analysts at BofA see earnings rising at a solid double-digit clip next year with out-year EPS growing at an even faster pace. The current consensus estimate is about in line with what BofA sees. Dividends, meanwhile, are expected to climb at a steady pace over the coming quarters while Visa's earnings multiple on both an operating and GAAP basis turn more favorable in later periods.
The company trades at just a slight premium to the S&P 500 on an EV/EBITDA basis while its free cash flow yield is not particularly high, but it is growing. If we assign its 5-year average P/E of 32x to $10 of next-12-month EPS, the fair value is near $320. I would discount that by 10-15% given higher interest rates today, but that still leaves shares undervalued.
Visa: Earnings, Valuation, Dividend Yield, Free Cash Flow Forecasts
Source: BofA Global Research
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q1 2024 earnings date of Tuesday, January 23, 2024, AMC. Mark that date on your calendar if you hold the stock as that's also when the company's annual shareholder meeting takes place.
Corporate Event Risk Calendar
Source: Wall Street Horizon
The Technical Take
With a bullish fundamental backdrop, albeit with a premium earnings multiple, Visa's chart is constructive. Notice in the graph below that a broad cup and handle pattern is in play. A breakout above the $250 to $253 zone would portend an upside measure move price objective to near $330 based on the depth of the correction off the $253 all-time high. Shares fell hard from Q3 2021 to an October 2022 low under $175. It has been a series of higher highs and higher lows in the last 13 months, though, with a rising long-term 200-day moving average (a weekly chart below is shown – the 40-week moving average is comparable to the 200dma), the trend favors the bulls.
Also take a look at the RSI momentum gauge at the top of the graph. It's been ranging in a bullish zone – technicians like to see an oscillator like this hover above 40 to support the case for a bullish price trend. What I also like about the V chart is that there is a significant amount of volume by price from $240 down to $210 – so pullback should be seen as buying opportunities rather than forced-selling events. Support is seen at $227 while the all-time high near $253 is current resistance.
Overall, long here with a stop under $220 appears favorable with an ultimate target to near $330 being in play if we get a breakout above noted resistance.
Visa: Bullish Cup and Handle Pattern, $253 Resistance, $227 Support
Source: Stockcharts.com
The Bottom Line
I assert that Visa is an attractive stock within a low-growth sector. Its strong free cash flow, shareholder accretive activities, dividend growth, solid quarterly performance trends, and technical momentum all point to the odds of higher prices ahead.
